What did the Fed say about the neutral rate?
Various officials from the Federal Reserve (such as Chris Waller) indicated that current rates (around 4.25%–4.50%) are above the estimated neutral level, between 3% and 3.5%. They suggested that there is room for multiple cuts in the coming months.
Official projections estimate this 'neutral level' around 3%, although certain representatives from the Fed suggest it could be as high as 4%, depending on the economic model; before the pandemic, the range was closer to 2.5%.
How does the crypto market react to this?
The expectation of rate cuts has boosted markets: there is over a 95% chance of a cut in September, and expectations of at least two additional cuts before the end of the year. This outlook has improved sentiment in risk assets like cryptocurrencies.
Historically, rate reductions tend to be positive for crypto: it increases liquidity, decreases the attractiveness of fixed income assets, and increases rotation towards more speculative assets.
What does this mean for crypto investors?
Rates above neutral: Downward pressure on the economy, but room for cuts
Imminent cuts; Potential return of momentum for BTC, ETH, altcoins
Banking illiquidity: Bet on non-traditional assets like crypto increases
The Fed is still above the neutral level in its interest rates, which paves the way for imminent cuts, as officials have already signaled this publicly. This can provide a favorable environment for risk assets, especially cryptocurrencies, which tend to benefit from more expansive monetary policies.
